The Difference Between Money Market and Capital Market (2024)

Money Market Vs. Capital Market:An Overview

The money market and the capital market are not single institutions but two broad components of the global financial system.

  • The money market is the trade in short-term debt. It is a constant flow of cash between governments, corporations, banks, and financial institutions, borrowing and lending for a term as short as overnight and no longer than a year.
  • The capital market encompasses the trade in both stocks and bonds. These are long-term assets bought by financial institutions, professional brokers, and individual investors.

Together, the money market and the capital market comprise a large portion of what is known as the financial market.

The Money Market

The money market is a good place for individuals, banks, other companies, and governments to park cash for a short period of time, usually one year or less. It exists so that businesses and governments that need cash to operate can get it quickly at a reasonable cost, and so that businesses that have more cash than they need can put it to use.

Key Takeaways

  • The money market is a short-term lending system. Borrowers tap it for the cash they need to operate from day to day. Lenders use it to put spare cash to work.
  • The capital market is geared toward long-term investing. Companies issue stocks and bonds to raise money to grow their businesses. Investors buy them to share in that growth.
  • The money market is less risky than the capital market while the capital market is potentially more rewarding.

The returns are modest but the risks are low. The instruments used in the money markets include deposits, collateral loans, acceptances, and bills of exchange. Institutions operating in the money markets include the Federal Reserve, commercial banks, and acceptance houses.

When a company or government issues short-term debt, it'susually to cover routine operating expenses or supply working capital, not for capital improvements or large-scale projects.

About Liquidity

The money market plays a key role in ensuringthat banks, other companies, and governments maintain the appropriate level of liquidity on a daily basis, without falling short and needing a more expensive loan and without hoarding excess cash that isn't earning interest.

Individual investors may use the money markets to invest their savings in a safe and accessible place. Many choices are available, including mutual funds that focus on state money market funds, municipal funds, and U.S. Treasury funds. Many of the government funds are tax-free. A money-market fund also can be opened at most banks.

The Capital Market

The capital market is where stocks and bonds are traded. Its movements from hour to hour are constantly monitored and analyzed for clues as to the health of the economy at large, the status of every industry in it, and the consensus for the short-term future.

The overriding goal of the companies institutions that enter into the capital markets is to raise money for their long-term purposes, which usually come down to expanding their businesses and increasing their revenues. They do this by issuing stock shares and by selling corporate bonds.

Primary and Secondary

The capital market is roughly divided into a primary market and a secondary market. A company that issues a round of stock or a new bond places it in the primary market for sale directly to investors or institutions. If and when those buyers decide to sell their shares or bonds, they do so on the secondary market. The original issuer of those stocks or bonds does not immediately benefit from their resale, although companies certainly have an interest in the price of their stock shares rising over time.

The capital market is by nature riskier than the money market and has greater potential gains and losses.

What are four examples of money market instruments?

Examples of money market instruments include certificates of deposit (CDs), commercial paper, Treasury bills (T-bills), and banker's acceptances.

What are the types of capital markets?

Capital markets can be broken down into primary and secondary markets. The primary market is where stocks and bonds are first issued to investors. The secondary market, on the other hand, is where securities that have already been issued are traded between investors.

What are 3 types of capital market?

Capital markets can include the stock market, the bond market, and the forex market. Each of these markets trade a different asset class.

The Bottom Line

The money market and capital market are often talked about. Together, they make up a large chunk of the global financial market.

The money market is where short-term financial instruments with a holding period of a year or less are traded. It essentially works as a short-term lending and borrowing platform for its participants, with investors in this market either gaining access to funds or earning interest on them. The capital market is also a venue where people make money but has different characteristics. In this market, there are entities that issue shares, bonds, or other long-term securities to raise capital and grow their businesses, and those who invest in these instruments, hoping to turn a profit.

The key distinguishing factors are time and rewards. Money markets are made up of short-term investments carrying less risk, whereas capital markets are more geared toward the longer term and offer greater potential gains and losses.

The Difference Between Money Market and Capital Market (2024)

FAQs

The Difference Between Money Market and Capital Market? ›

Money markets are made up of short-term investments carrying less risk, whereas capital markets are more geared toward the longer term and offer greater potential gains and losses.

What is the main difference between money markets and capital markets quizlet? ›

Capital markets are markets in which money is lent for periods longer than a year, while money markets are markets in which money is lent for periods of less than a year.

What is the difference between money and capital? ›

It's a common misconception but they are demonstrably not the same thing. A quick definition from an academic website put it this way: “Capital comprises the physical and non-physical assets (such as education and skills) used in making goods and services. Money is primarily a means of exchanging one good for another.

What is the difference between financial market and capital market? ›

The financial market is where all trades involving financial assets happen. The capital market is where companies and governments go to raise long-term capital. The stock market is where people buy and sell equity in listed corporations. The bond market is where people buy and sell bonds.

What is the difference between money market and capital market shaala? ›

The capital market deals with long-term securities (maturity period exceeding one year), while the money market focuses on short-term tools (maturity up to one year).

How are the capital market and money market similar? ›

Similarities between the money market and capital market are as follows: Both are important components of the international finance market. Both markets permit investors to purchase debt securities. Businesses and governments depend on both the markets for raising money for operations.

What is a capital market example? ›

Some examples of capital markets are NASDAQ, BSE, New York Stock Exchange, London Stock Exchange.

What is the difference between money capital and wealth? ›

Money is the medium of exchange, wealth is the accumulation of valuable assets and possessions, and capital includes financial and non-financial resources used in economic production. Wealth refers to anything of value.

What is the meaning of capital market? ›

Capital markets are financial markets that bring buyers and sellers together to trade stocks, bonds, currencies, and other financial assets. Capital markets include the stock market and the bond market.

What does the capital market consist of? ›

Capital markets are composed of primary and secondary markets. The most common capital markets are the stock market and the bond market. They seek to improve transactional efficiencies by bringing suppliers together with those seeking capital and providing a place where they can exchange securities.

How to invest in the money market? ›

The money market involves the purchase and sale of large volumes of very short-term debt products, such as overnight reserves or commercial paper. An individual may invest in the money market by purchasing a money market mutual fund, buying a Treasury bill, or opening a money market account at a bank.

What is money at call? ›

Money-at-call is any type of short-term, interest-earning financial loan that the borrower has to pay back immediately when the lender demands. Money-at-call gives banks a way to earn interest, known as the call-loan rate, while retaining liquidity and, after cash, it is the most liquid asset on their balance sheet.

What are the advantages of the capital market? ›

Helps in raising long term capital. Helps in revival of sick units. Providing funds for development of backward areas. Channelisation of funds in a proper way.

What is the capital market and its importance? ›

Capital Market is a place where different financial instruments are traded between different entities. On one side, there are entities that have abundant capital, much more than they require and on the other side, there are entities who need capital for various purposes.

What is the concept of the money market? ›

The money market is an organized exchange market where participants can lend and borrow short-term, high-quality debt securities with average maturities of one year or less.

What are the instruments of the money market? ›

Examples of money market instruments are treasury bills, commercial papers, certificates of deposits, call money, call (overnight), commercial bills and short-notice (up to fourteen days) money, and term money. All these instruments will have a maturity period of less than 1 year.

What do you mean by capital markets? ›

Capital markets allow traders to buy and sell stocks and bonds, and enable businesses to raise financial capital to grow. Businesses also have reduced risk and expenses in acquiring financial capital because they have reliable markets where they can obtain funding.

What is the definition of a money market quizlet? ›

Money Market. The part of the global financial market that deals with financial instruments that are easily converted to cash (highly liquid) and have very short maturities, usually one year or less.

What is the function of the money market? ›

The money market provides financing to local and international traders who are in urgent need of short-term funds. It provides a facility to discount bills of exchange, and this provides immediate financing to pay for goods and services. International traders benefit from the acceptance houses and discount markets.

What is the difference between money market and foreign exchange market? ›

Foreign exchange markets allow for the trading of foreign currencies, using instruments such as spot transactions, futures, forwards, and swaps. Money markets link international lenders of short-term funds with borrowers using instruments such as Eurocurrencies and Eurobonds.

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